Last post on Dec 09, 2013 at 5:17 PM
You are in the Prices Paid - Buying & Leasing Experiences
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Honda Accord, Car Leasing, Coupe, Sedan
#5427 of 5565 Re: Residual Value calculation [delta737h]
Aug 21, 2013 (2:36 pm)
John - thanks - went back and looked at the post i made and somehow what I posted is not what I meant - typo I guess. I'm familiar with leasing so I understand that it should've been .00075 (25k + 15k). I should've proofread more closely. But if you indeed apply the money factor to the entire 40k during the lease term, how is that not paying interest on the residual?
Why would the residual even need to be in the formula?
You can do the short version if you want.
#5428 of 5565 Re: Residual Value calculation [gmanusmc]
Aug 21, 2013 (2:25 pm)
Yup, I thought so.
A lease is amortized in much the same way that a loan is amortized. You begin by computing interest on the adlj. cap less the first payment. The interest is deducted from the base payment to determine the amount of principle to be deducted from the previously lease balance. This process continues for the entire term of the lease. The ending lease balance is the the residual value. At that point, you'll either return, trade, or buy the car for the amount of the residual. If you buy, you'll have to pay tax on the residual which can be financed.
But, you never pay interest on the residual because the lease balance, which always exceeds the residual, is reduced each month until the final balance is reached. This balance is the residual. Now, if you extended the lease for an additional 3 months beyond say, a 36 month lease for example, then some fund providers may continue to amortize the lease beyond the residual so that after 39 months, you could buy the car for something less than the residual. This is the only situation in which one would pay interest on the residual. I think if you click on the link and look at the lease amortization schedule that I provided in the earlier post, you'll see what I'm talking about.
Am I making sense?
#5429 of 5565 Re: Residual Value calculation [delta737h]
Aug 21, 2013 (2:49 pm)
Thanks John - I'm gonna take a look at your info when I can devote some more time to this. I've never looked at it this deeply. I just made an edit to my response to you that you probably haven't seen. You're making perfect sense but I guess where I get hung up is why does the residual even have to be in the formula if there is no interest on it? Why wouldn't the interest (money factor) not just be applied to the cap cost?
Thanks for the help,
#5430 of 5565 Re: Residual Value calculation [brian125]
Aug 21, 2013 (2:53 pm)
Brian, if you need more help when it's time to lease, just invite us down to your place in Myrtle Beach and we'll answer all your questions, but don't invite the AutoLeaseGeek or Bill won't come
#5431 of 5565 Re: Residual Value calculation [huskerfan5]
Aug 21, 2013 (3:11 pm)
That's ok - John seems to be a good guy and he only wants to make sure the leasing info is correct so I'd have no problem throwing down a beer with him if he's so inclined. I don't have time to study his site at the moment but will later on. Gary - what am I missing here - if there is no interest calculated on the residual, why is it a part of the formula that calculates the monthly cost of the lease?
Sorry I opened Pandora's box
#5432 of 5565 Re: Residual Value calculation [gmanusmc]
by kyfdx@Edmunds HOST
Aug 21, 2013 (3:16 pm)
They use the residual, because the amount subject to finance charges is an average of the CAP cost and the residual... Rather than adding them together, and then dividing by 2, they just add them together and make the division adjustment to the money factor.
Think of it as a loan.. where you borrow the CAP cost, then pay the principal down to the residual amount... While a loan wouldn't have equal finance charges throughout, a lease does (which makes it easier to calculate)..
#5433 of 5565 Re: Residual Value calculation [gmanusmc]
Aug 21, 2013 (3:17 pm)
Because the formula...
MF x (Adj. Cap + Residual) reflects interest on the estimated average lease balance through the entire term. The expression...
(int rate/12) x (adj cap + residual)/2 is equivalent to the above formula. The term...
(adj cap + residual)/2 reflects the estimated average lease balance while the term...
(int rate/12) reflects an estimate of the monthly interest rate.
Remember that the formula [money factor x 2400] that is often quoted only gives an estimate of the interest rate. It's very close but it's not exact.
#5434 of 5565 Lease cost calculation
Aug 21, 2013 (3:31 pm)
Ok guys - I think you finally got through to this thick military mind - just did a loan calc based on my original example and the amount of interest comes out right for 32.5k financed at 1.9 for 36 months. I've just always looked at it simply as money factor multiplied by the sum of cap cost and residual. Now if we can get Brian to fly us into myrtle beach, we're set.
#5435 of 5565 Re: Lease cost calculation [gmanusmc]
Aug 21, 2013 (3:36 pm)
Count me in!
#5436 of 5565 Re: Residual Value calculation [kyfdx@Edmunds]
Aug 21, 2013 (3:42 pm)
You said essentially the same thing I said. However, your explanation is much shorter, easy to understand, and much more elegant than mine. Wish I had thought of it.